Satyendra Pathak
Doha
The year 2022 or 2023 could be watershed years for Nakilat if it is selected as one of the ship owners involved in Qatar’s massive LNG expansion programme, QNB Financial Services (QNBFS) has said in a company report published recently.
Considering Nakilat’s strategic importance and impressive track record in Qatar’s existing LNG shipping value chain, QNBFS said, “We expect Nakilat to be a major beneficiary of this expansion. Our analysis also reveals that every incremental vessel (@100%) adds roughly 1 percent to our target price and an award of 20-30 ships could significantly increase our price target and estimates.”
“The stock has essentially dropped anchor and is in a holding pattern as we await news about a potential contract win. Given typical lead times for LNG ship construction, we should expect to hear about final ship owner selections later in 2022 or early 2023. We remain bullish on Nakilat and consider it as the best avenue for equity investors to participate in the long-term growth expected in Qatar’s LNG sector,” it said.
Irrespective of the volatility of the LNG shipping market, the report said, Nakilat’s business should remain relatively unaffected given its LT charters.
“Nakilat’s fleet continues to provide the company with stable, contractually sustained cash flow that allows for a healthy residual income stream for equity investors after providing for debt service. Moreover, the 40-year life of Nakilat’s vessels against the maximum debt life of 25 years with the last debt maturing in 2033 could lead to value-enhancement. Near-term, the addition of 4 LNG ships and impetus in the shipyard should aid 2022 earnings growth,” it said.
“We project a 9.7 percent EPS growth for 2022. Our previous forecast called for an earnings growth rate of 7.4 percent. Our 2022 net income forecast of QR1.48 billion is driven by higher JV income as 2022 is the first year of near full-year contribution from the 60 percent-owned Global Shipping JV, along with the growth from the shipping JVs and the shipyard,” the report said.
“We note our 2H2022 earnings estimate of QR754.8 million is consistent with 1H2022’s QR729.6 million, which included roughly QR30 million in the one-time write-off of legacy financing costs due to refinancing. For next year, similar factors, along with a modest fall in finance charges despite higher rates as 70 percent of Nakilat’s interest costs, including debt held in JVs, are fixed/hedged drive our 1.9 percent growth in earnings to QR1.51 billion,” it said.
“We remain hopeful that Nakilat could secure a significant share of upcoming NF ship contract awards. QatarEnergy is expanding Qatar’s LNG capacity from 77 MTPA to 110 MTPA with the first production expected in 4Q2025 and further to 126 MTPA a couple of years later,” the report said.
To cater to this expansion, back in April/June 2020, QatarEnergy signed major LNG shipbuilding capacity agreements with Chinese and South Korean companies to build more than 100 LNG vessels worth more than QR70 billion.
Furthermore, in the first quarter of 2021, QatarEnergy issued an invitation to tender a package to ship owners for the chartering of LNG carriers in relation to this project. QatarEnergy intends to assign selected ship owners from this tender to the shipyards’ construction slots reserved in China and South Korea. In October and November of 2021, QatarEnergy moved ahead with the construction of ten LNG ships with four in China and six in South Korea.
Given typical lead times for LNG ship construction, the report said, “We should expect to hear about final ship owner selections later in 2022 or early 2023. We do note that already on April 12, 2022, QatarEnergy announced that it awarded its first batch of time-charter parties (TCPs) with a subsidiary of Mitsui O.S.K Lines (MOL) for the long-term charter and operation of four LNG ships.”
In a statement, Minister of State for Energy Affairs HE Saad Sherida Al Kaabi, who is also the president and CEO of QatarEnergy, stated that he expected to announce similar contracts in the near future.
In early June 2022, South Korean shipbuilders announced some details of construction orders involving six ships (174k cm each) at a cost of $215 million per ship.
“Considering Nakilat’s strategic importance and impressive track record in Qatar’s existing LNG shipping value chain, we expect Nakilat to be a major beneficiary and secure a meaningful share of new contracts,” it said.
The report said, “High leverage but backed by watertight charter agreements; we do not foresee issues in debt servicing or repayments. Nakilat has QR19.4 billion in debt (92 percent of its market cap). Nakilat made QR1.1 billion in principal repayments in 2021 and we expect another QR1.1 billion in repayments this year. Two major bank-loan bullet payments, totalling QR10 billion, are due in 2025 but we expect Nakilat to refinance most of this amount.
“We model principal repayments and finance charges to average QR2.2 billion over 2021-33, which is easily covered by OCF (average QR2.8 billion over 2021-33) and FCF before finance charges (2021-33 averageQR3.2 billion).”
“We continue to assume the entire debt is paid off by 2033. Nakilat’s high leverage remains manageable as debt is mostly secured by watertight charter agreements for its existing fleet. Considering the current $230 million price tag for LNG ship new builds, if we assume an increase of 25 vessels related to the NF expansion, Nakilat will have to take on new debt of QR16.8 billion. However, this debt would also be secured by charters and hence, not a cause for concern. We also expect a portion of this fleet increase to be done through JVs, keeping the related debt ring-fenced/off the books,” it said.
